TMI Blog1961 (10) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... or as partners, each of them being entitled to a half share. It also provided that as the legatees were ladies the actual management of the business should be with their husbands, acting subject to the supervision of the former. Soon after the death of Appu Chettiar an inventory of his stock in trade was taken as on January 6, 1951, and the stock was valued at ₹ 2,78,866. There was a temporary cessation of the business on Appu Chettiar's death but it was recommenced by the two daughters on January 22, 1951, when they formed themselves into a partnership as provided for in the will of their deceased father. The assessee opened new books of accounts as and from that date continuing the mercantile system of accounting adopted by the deceased. The entire closing stock of the deceased's business was taken over by the new business as its opening stock, but the inventory value of the previous business was however not adopted. Instead, the market price of the stock in trade as on January 6, 1951, was taken as the value of the opening stock of the new partnership business; that was ₹ 3,53,064. There is no dispute now that this sum represents the actual market value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whichever was lower is neither correct nor definite. That Appu Chettiar originally valued his stock at the price at which he had acquired it and the closing down value of the stock of Appu Chettiar's business was on the basis of the cost and not on the basis of the market value is not disputed; no question adopting any lower valuation therefore arose. It is equally not a matter of dispute that the assessee fixed the value of its opening stock at market value as on January 6, 1951. The question there is what is the principle of stock valuation for income-tax purposes under the mercantile system of accounting in a case where there has been a succession to a business. Two alternative contentions are raised on behalf of the department on that question; the first is that the value of the opening stock, so far as the assessee's business was concerned, should be taken as nil as the assessee obtained stock, only by virtue of a testamentary disposition by Appu Chettiar, the stock not having been paid for by them. If this argument was to be accepted the entire sale proceeds of the stock will have to be brought in as part of the gross profit earned during the years. The second is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stock. In this process when the value of the stock is entered by the trader at the time of his purchase at cost price, it represents its value to the owner, for that is the amount for which he bought the goods. In Osborne v. Steel Barrel Co. Ltd. [1942] 24 Tax Cas. 293 the assessee company was formed to acquire and carry on business previously carried on by another company which was being liquidated. The assets of the old company were sold to one B. for 10,500. B in turn sold those assets to the assessee for a consolidated consideration of 10,500 plus 29,997 shares valued at 1 each in the assessee company. The stock-in-trade as taken over by the assessee from the old company was shown as of the value of 2,493 but in the books of the assessee it was shown as 10,500 plus 29,997 (the share value). The Crown contended that the profits should be computed only on the basis of the stock value which was 2,493. But the Commissioners made an estimate of the market value of the stock-in-trade on the date of the formation of the assessee company at 10,000. It was accepted in that case that the figure for the stock at the commencement of the business ought to be the actual co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above cannot apply as the assessee obtains the stocks by paying nothing and that sound commercial practice requires that the value of the goods should be at the price which cost him, namely, nil price. This contention is sought to be supported by relying on the rule recognised in the undermentioned cases, namely, that in the matter of assessment to tax one has to pay regard to the existence of profit from the point of view of a commercial man. In Sir Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 I.T.R. 506 (S.C.) the Supreme Court held that in matters of revenue regard must be had to the substance of the transaction rather than to the mere form and the department can take into account only the income, profits and gains made in the relevant year of account and was not concerned with the potential profits which may be made in another year. In that case, a trade and created a trust for the benefit of certain beneficiaries. The stock-in-trade so taken out were valued at the time of the withdrawal at the original cost price to the assessee. The Bombay High Court held that such stock-in-trade ought to have been valued at the market rate on the date of its transfer and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original cost of the goods that it to be shown as the value of the opening stock-in-trade or is the market price of the goods on the date when the goods are put into the business that has to be taken? At the time when the goods were purchased there was no business. The cost or value in such a case to the businessman would be the value of the goods as they stood on the date when he put them into his business as part of his stock-in-trade. There is yet another reason by which the same conclusion can be reached. The figure to be adopted as in valuing the stock at the commencement of a business will be the actual cost of the stock if it could be ascertained. As a legatee pays no price for the stock received under a bequest market value as representing the cost to him can alone be taken. In the present case as well, the two legatees became the owners of the stock-in-trade under the will of their father. When they started their own business on January 21, 1951, they should be regarded as having put their own property into their business and the value of such stock should, therefore, be the value to the owner, namely, the assessee; that would be the market price. But Mr. Ranganath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken to be based on its value to the owner it must follow that it is the market price on that date when such stock is put into that business that would be the cost price to the owner. But the case will, however, be different if the owner instead of putting his own stock into the business purchases stock for the purpose of his business. In the latter case the value of the stock will be the price paid for it. This principle has been recognised in cases involving questions as to granting of depreciation allowances. In Commissioner of Income-tax v. Solomon and Sons [1933] 1 I.T.R. 324, 328 a question arose as to the basis of the depreciation allowance in regard to a property obtained by the assessee under a will. Under section 10(2)(vi) of the Income-tax Act, then in force, depreciation was allowable in regard to buildings, machinery, etc., a certain percentage on the original cost thereof to the assessee. It was held that the original cost to the assessee in a case where he obtained property under a will would be the real value of the property at the time when the assessee required it. Page C.J., delivering the judgment of the Special Bench, observed: In my opinion, however, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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